We Can't Tax Our Way Out of the Entitlement Crisis

By R. GLENN HUBBARD

Given the hearty support Democratic presidential candidate Barack Obama received in Europe last month, he must have noticed the surprise and skepticism among some Germans when he asked that Europeans contribute more for defense. Many Europeans argue they cannot afford such an additional expenditure.

They are right. And therein lies a cautionary tale for the United States, because continental Europe has been following something like Mr. Obama's plans for spending and taxes.

Mr. Obama has revealed his plans in stages. First, on his campaign Web site, he indicated he would solve the long-run solvency of Social Security (a good thing). In a Sept. 21, 2007, op-ed in Iowa's Quad-City Times, he ruled out benefit cuts to achieve solvency and looked first to payroll taxes (a bad thing). Last week, on this page, his economic advisers clarified his evolving tax proposals.

The spending shortfalls in Social Security and Medicare are large. According to the Congressional Budget Office, Social Security and Medicare spending left unchecked would, after a generation, consume about 10 percentage points more of GDP than it does today.

Simple arithmetic suggests that with this much more of GDP eaten up by the two programs, all federal taxes on average would have to be raised by more than 50% to make up the shortfall. Research by economists Eric Engen of the Federal Reserve Board and Jonathan Skinner of Dartmouth suggests that such a tax increase would reduce long-term GDP growth by about a full percentage point. This is no small matter: Think of it as reversing all of the gains in our long-term growth rate from the productivity boom of the past 15 years.

Now it is easy to understand European concerns about higher defense spending. Large entitlement budgets almost certainly cannot be financed with growth-chilling taxes alone. Spending on other areas, including defense but also education, research, etc., must also be adversely affected.

In their op-ed on this page, Obama economic advisers Jason Furman and Austan Goolsbee noted that taxpayers whose incomes exceeded $250,000 would face an additional Social Security payroll tax increase of four percentage points (in addition to a five-percentage-point increase in the top marginal income tax rate). This new payroll tax plan would affect the top 3% of earners.

The new payroll tax hike is more modest than the one Mr. Obama hinted at last fall, which might have uncapped the payroll tax entirely. But it would also do very little to shore up Social Security, since it means that no more than 15% of Social Security's long-term funding gap would be closed. Thus, if Mr. Obama is indeed opposed to reductions in Social Security spending growth, he is necessarily committed to large future payroll-tax or general income-tax increases.

And what of those other tax increases? In May 2007, candidate Obama proposed to offset costs of his health-care plan in part by allowing the Bush tax cuts on Americans earning over $250,000 to expire. But Mr. Furman and Mr. Goolsbee suggested that dividend and capital gains tax rates would be raised to 20%, but well below levels (for dividends) prior to the 2003 tax cut. While kudos are due to this tempering of a tax increase, one can infer from the candidate's earlier statements that the senator had counted on these revenues to offset health-care spending and to pay for middle-class tax cuts.

In short, Mr. Obama has articulated a plan for higher federal spending, leaving open the question of what tax increases are next.

If Mr. Obama is going to increase spending, will he raise the money by higher business taxes instead? He has already distanced himself from John McCain's call to reduce America's corporate tax rate, and he is committed to raising tax rates on successful small business owners who pay individual as opposed to corporate income taxes. Does this mean he will raise tax burdens on individuals with annual incomes less than $250,000?

In a June 26 interview on the Fox Business channel, Mr. Obama said he wanted to roll back the Bush tax cuts for those in the top 5% of incomes -- that is, about $145,000 per year. He also voted for the Democrats' fiscal year 2009 Budget Resolution, which would raise taxes on individuals earning $42,000 or more.

There is another fiscal way. Balancing the federal budget without a tax increase is possible, but will require strong fiscal restraint. To achieve full-employment budget balance by the end of the next president's term in office, federal nondefense spending growth needs to be restrained to 2% per year instead of the currently projected 4.5%. And modest defense spending increases to fund costs of needed improvements in national security are possible.

We can also secure a firm financial footing for Social Security (and Medicare) without choking off economic growth or curtailing our flexibility to pursue other spending priorities. Three actions are essential: (1) reduce entitlement spending growth through some form of means testing; (2) eliminate all nonessential spending in the rest of the budget; and (3) adopt policies that promote economic growth. This 180-degree difference from Mr. Obama's fiscal plan forms the basis of Sen. McCain's priorities for spending, taxes and health care.

The problem with Mr. Obama's fiscal plans is not that that they lack vision. On the contrary, the vision is plain enough: a larger welfare state paid for by higher taxes. The problem is not even that they imply change. The problem is that his plans are statist.

While the candidate is sending a fiscal "Ich bin ein Berliner" message to Americans, European critics of his call for greater spending on defense are the canary in the coal mine for what lies ahead with his vision for the United States.

Mr. Hubbard, dean of Columbia University Business School, was chairman of the Council of Economic Advisers under President George W. Bush.

Conventions Need a Believable Script

By KARL ROVE

What must Barack Obama and John McCain achieve at their conventions? Conventions are the best, most controlled opportunities left for the candidates. Only the debates come close in impact, but they are unpredictable and not susceptible to the choreography available at the conventions.

Mr. McCain's handlers must achieve three things. First is a greater public awareness of the character that makes him worthy of the Oval Office. Mr. McCain's warrior ethic makes it difficult for him to share his interior life, though his conversation with Rick Warren did provide moving glimpses into it. To win, Mr. McCain will need to show more.

Associated Press

Al Gore's 'bounce' wasn't high enough.

Mr. McCain's second goal is to persuade Americans he can tackle domestic challenges. Voters trust him as commander in chief. The doubts are whether he understands their concerns about their jobs, their family's health care, their children's education, the culture's coarseness, and their neighborhood's safety.

Third, Mr. McCain must show voters he remains a maverick who will, as president, work across party lines as he has as senator. Naming a Democrat or two he will draw into his cabinet would remind people of his bi-partisanship.

Mr. Obama, on the other hand, needs to reassure Americans he is up to the job. Voters recognize he represents change, yet they are unsettled. Does he have the experience to be president? There are growing concerns, which the McCain campaign has tapped, that Mr. Obama is an inexperienced celebrity-politician smitten with his own press clippings.

And is there really a "there" there? Besides withdrawing from Iraq, it's not clear what issues are really important to him. Does he do his homework or is he intellectually lazy? Is there an issue on which he would do the unpopular thing or break with party orthodoxy? Is his candidacy about important answers or simply about us being the "change we've been waiting for"? Substance will help diminish concerns about his heft and fitness for the job.

Mr. Obama's performance this summer has added to voter doubts, putting a large burden on his acceptance speech. There are challenges in a speech staged with 75,000 screaming partisans at INVESCO Field. Will it deepen the impression that he's more of a rock star than a person of serious public purpose, or can Mr. Obama have the serious conversation he needs to reassure Americans?

Neither candidate will be well served by making their principal focus the demonization of the opposition. True believers inside the halls and loyalists in front of their televisions will demand a certain level of abuse of the other party. But more Americans are undecided than have been in nearly 30 years. Voters want to learn more about these two men, their personal values and their public vision. Every possible minute should be spent on these.

Conventions are mini-dramas made for news coverage. Every hour, especially in the evening, is carefully scripted. Voters understand conventions are theatrical productions performed for their benefit. They grasp candidates are showcased as perfect as speeches, films, staging and flackery can make them.

But even well-scripted productions fail if they are seen as phony. Plays that don't ring true, actors who don't seem authentic, and storylines that seem contrived all fall flat. So too for political conventions. They succeed when candidates are seen at their natural best. "The Kiss" worked for Al Gore while "I'm John Kerry and I'm reporting for duty" did not.

How will we know if the candidates achieve their goals? Perhaps by observing the convention bounces -- the jump each receives in polls the week after their conventions. Professor Tom Holbrook of UW-Milwaukee says history suggests the candidate thought to be running ahead of where he should be (Mr. McCain) will get a smaller bounce, while the candidate generally thought to be running behind expectations (Mr. Obama) will get a larger one. Mr. Holbrook also finds the earlier convention gets the bigger bump, another Obama advantage.

Even then, the size of the bounce alone isn't determinative. Barry Goldwater and Al Gore got large bumps and lost, while Presidents Reagan and Bush in their re-elections received small bounces and won. The real question is durability. Are there lasting changes in how a candidate is perceived?

The day is long past when conventions were spontaneous and dramatic. It's hard to envision anything today like the riots at the 1968 Chicago Democratic convention or the Dixiecrat walkout in 1948. It's unlikely we'll see again dramatic floor fights as at the 1964 GOP convention at San Francisco's Cow Palace, or the 103 ballots it took Democrats to nominate John W. Davis in 1920. But conventions still shape voters' understanding of the men who want to be president. And because they do, conventions can still shape, and maybe even alter, an election.

Mr. Rove is a former senior adviser and deputy chief of staff to President George W. Bush.

Rebels push to sever Georgia ties

Russian TV showed a huge crowd at the rally in Abkhazia

The separatist leaders of Georgia's breakaway regions of Abkhazia and South Ossetia have urged Russia to recognise their independence, at mass rallies.

Russian Foreign Minister Sergei Lavrov said Moscow's response to their pleas would depend on the conduct of Georgian President Mikhail Saakashvili.

Russia says it will keep troops in a security zone around South Ossetia.

It will extend several kilometres into Georgia proper. Russia also plans to strengthen its South Ossetia force.

"Tomorrow, eight checkpoints will be established in the security zone in which 500 peacekeepers will be deployed, no more than that," said Mr Lavrov, quoted by Reuters news agency.

It is still not clear to what extent Russian military forces have withdrawn from Georgia, despite Moscow's promise to pull out most of its troops by the end of Friday.

See a map of the region

Russian news agencies say an armoured column, consisting of more than 40 vehicles, has passed through South Ossetia, on its way to the Russian border.

A BBC correspondent in the Georgian village of Igoeti, just 35km (21 miles) from the capital Tbilisi, said he saw the Russian military pulling back towards South Ossetia early on Thursday afternoon. Russian forces were also reported to be still dug in around Georgia's main Black Sea port of Poti.

Russia poured troops into Georgia after Georgian forces tried to retake South Ossetia on 7 August. Russian-led peacekeeping troops had been deployed there since a war in the early 1990s.

Russian troops moved far into Georgia from the breakaway regions

Thousands of people attended pro-independence rallies in the Abkhaz capital Sukhumi and war-ravaged South Ossetian capital Tskhinvali on Thursday.

The world-renowned conductor Valery Gergiyev - himself an Ossetian - plans to give a concert in South Ossetia with his St Petersburg orchestra on Thursday.

Chill in Nato-Russia ties

Meanwhile, Russia says it is reviewing its co-operation with Nato, which has insisted that Moscow pull its troops out of Georgia, in line with a French-brokered ceasefire agreement.

Nato said on Tuesday there could be no "business as usual" with Moscow.

PEACE PLAN No more use of force Stop all military actions for good Free access to humanitarian aid Georgian troops return to their places of permanent deployment Russian troops to return to pre-conflict positions International talks about security in South Ossetia and Abkhazia Georgia faces reality of defeat Who started the crisis? Nato's Russia dilemma Georgia conflict: Key statements

At an emergency meeting, Nato suspended formal contacts with Russia because of the Russian military presence in Georgia.

"Relations with Nato will be reviewed," Russian Deputy Foreign Minister Alexander Grushko was quoted as saying by Interfax news agency on Thursday.

"This will apply to the military co-operation programme," he said.

Nato has accused Russia of failing to respect the truce, which requires both Russian and Georgian forces to pull back to the positions they held before heavy fighting erupted in South Ossetia.

On Wednesday, Norway's defence ministry said Russia had informed Norwegian diplomats that it was planning to freeze co-operation with Nato.

Norway's Aftenposten newspaper said Oslo was trying to establish exactly what impact the Russian decision would have on existing co-operation, such as joint rescue operations and border controls. Norway shares a border with Russia in the Arctic.

A statement from the Norwegian defence ministry said: "Norway notes that Russia has decided that for now it is 'freezing' all military co-operation with Nato and allied countries.

"We expect that this will not affect planned activities in the areas of coastguard operations, search and rescue and resource management, because on the Russian side these are handled by civilian authorities."

Russia has not yet given Norway formal written notification about its suspension of co-operation, a ministry spokesperson said.

Russia's permanent envoy at Nato headquarters in Brussels, Dmitry Rogozin, has been recalled to Moscow for consultations, Russia's Itar-Tass news agency reports.

He said that in light of Nato's position on the Georgia conflict, relations with Nato "really cannot remain as before", but he added that "there will not be a cold war".

A state secretary in Norway's defence ministry, Espen Barth Eide, said "there's no doubt that our relationship to Russia has now chilled".

Pakistan bombers hit arms factory

Aftermath of two bomb blasts outside a munitions factory in Wah

At least 63 people have been killed in twin suicide bombings outside a munitions factory in the Pakistani town of Wah, hospital sources say.

The attack is the deadliest on a military site in Pakistan's history.

The bombs hit the city, 30km (18 miles) north of Islamabad, as workers left. Many people were injured.

A spokesman for the Pakistani Taleban said they had carried out the attacks, which he said were a response to army violence in the country's north-west.

Speaking to the BBC, Maulvi Umar of the Tehrik-e-Taleban Pakistan said the bombings in Wah were in retaliation for the deaths of "innocent women and children" in the tribal area of Bajaur.

He said more attacks would take place in Pakistan's major urban conurbations unless the army withdrew from the tribal areas.

Correspondents say Wah, in the province of Punjab, is a strategically important town normally under heavy security as it is home to a large industrial complex producing conventional arms and ammunition.

Local police chief Nasir Khan Durrani told the BBC: "Many others have been injured and we expect casualties to rise in the coming hours.

"At least 25 people have been critically injured."

Mr Durrani said none of the dead was military personnel.

'Disturbing'

The first blast took place outside the gate of the factory as workers were leaving work during a shift change.

Minutes later, another blast took place at another gate of the same factory.

Tanks used by the Pakistani army are made at Wah

Mohid Ahmed, a student from Wah, was on a tour of the ordnance factories and witnessed the immediate aftermath of the blast from his bus.

"It was very disturbing," he told the BBC.

"There was smoke, bodies and blood. Those who were left alive were in great suffering. I saw a man clutching his leg and crying in pain and asking for help. I saw people running away from the scene."

On Tuesday, 32 people were killed in a suicide attack on a hospital in the northern town of Dera Ismail Khan.

The BBC's Syed Shoaib Hasan says it is the second recent direct attack on a Pakistani military installation.

Last September, 17 officers and soldiers were killed in a suicide attack on a special forces base in the nearby town of Tarbela-Ghazi.

The ordnance factories at Wah lie on the road into Pakistan's troubled north-west, where fighting between security forces and Islamic militants has raged in recent weeks.

Established in the early 1950s, it is a sprawling complex manufacturing everything from tanks and small arms to artillery shells.

Militants have often threatened to increase the level of violence unless the army pulls back from tribal areas close to the border with Afghanistan.

On Monday, President Musharraf, a key ally of President Bush's "war on terror" resigned after nine years in power to avoid being impeached.